The decision of the UK to leave the European Union was considered the biggest risk a nation might have taken to domestic financial stability. The GDP of the UK as a nation slowed down from 1.9 in 2017 to 1.4 in 2018, while business investments faced a huge blow. In 2019, the jobless rate throughout the United Kingdom fell to a forty-four-year low of 3.9% (Investopedia, 2021). The situation is due to employers favoring employee retention over investing in fresh recruits and significant initiatives. This analysis will focus on UK’s withdrawal from the European Union on interest rates and output. Focusing on the macroeconomic stage, the effect of the UK exit from the European Union can be comprehended using the aggregate demand and supply model.
The massive effect immediately manifested was the downfall of aggregate demand caused by the Brexit referendum. The referendum established uncertainty subjecting households to minimize their total expenditure while businesses to minimize their anticipated investments making the aggregate demand drop. In this case, the economic output of the UK, as represented by Gross Domestic Product (GDP), decreased to the extreme (Bank of England, 2022). UK leaving the European Union (EU) was subjected to an increased single market restriction in various sectors, increasing importation costs and decreasing aggregate demand. The decrease in aggregate demand forces the curve of equilibrium to drift leftwards. This impacted the rates of output and increased interest rates as the Country tried to equalize the graph. The general decrease in output amounted to 3.5 percent, which was significantly less than the normal circumstance within the Union (Bank of England, 2022). The major variables for such a huge loss in output rates emerge from the sanitary, technological barriers, and phytosanitary metrics of products concerning regulatory boundaries between the EU and the UK diverging consequences.
Within the same context of Brexit uncertainty, the exit call and votes implicate the value of the UK currency, making the pound drop with great inflation. Following closely, the interest rate increased in an attempt to control inflation by the BankBank of England. The interest rates of UK banks rose spontaneously from 0.1% to 3% by the end of 2021. The recorded high-interest rates and the failing aggregate demand establish free fall phenomena in the economic output. However, this was not final; the rise of basic products such as foodstuffs, energy, and other bills pressured the citizens. Such pressure increased the interest rates of the BankBank to the peak of 5.25 percent this year, tightening the financial situation in the Country. In order to reduce the inflation to 2 percent in the UK, higher interest rates were established for those borrowing money across the Country under the monetary policy by the Bank of England. The fiscal policy focused on energy for the last two years has effectively slowed the inflation rates and reduced and increased the output rates of the service to consumers.
The general cost for ensuring that the UK debts against the European Union increased when the EU provided limited negotiation chances for the United Kingdom. The CDC spreading edged into the euro region’s phenomena that forced the rates of interest to rise instantaneously. The rise in the debts against the EU vividly represented fear among major investors, making the Bank of England the last resort for people to borrow money at higher interest (Van Reenen, 2016). The prices of Equity in the United Kingdom dropped compared to Major countries, with only relief from globally listed companies. With major drawbacks in the export business, more than three million employment posts were implicated, making the UK output rates drop by 7 percent of the overall output while receiving a blow of 4 percent on exportation income globally (Arriola et al., 2020). The withdrawal from the EU cuts the dependency on the European market, increasing the aggregate demand in the Country.
The decision made by the United Kingdom to leave the European Union came with major negative implications for economic output and interest rates in the scope of short-term analysis. Nevertheless, the transition might present a more favorable outcome when put in the lens of a long-term implication. The most common positive implication is the freedom to establish negotiations with other countries and the European Union itself on favorable grounds. Such trading agreements may enhance the Country’s aggregate demand and economic output.
Reference
Van Reenen, J., 2016. Brexit’s long-run effects on the UK economy. Brookings papers on economic activity, pp.367-383.
Arriola, C., Benz, S., Mourougane, A. and van Tongeren, F., 2020. The trade impact of the UK’s exit from the EU Single Market.
Investopedia. (2021, May 22). Brexit Meaning and Impact: The Truth About the UK Leaving the EU. https://www.investopedia.com/terms/b/brexit.asp
Bank of England. . (2022, November 3). Monetary Policy Report – November 2022Monetary Policy Report – November 2022 | https://www.bankofengland.co.uk/monetary-policy-report/2022/november-2022
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